Brian Ashcroft

16 March 2012

Jobs the public sector and fiscal austerity

So how's it going? How badly hit have jobs in the Scottish public sector been since fiscal austerity began? How has the Scottish private sector fared? The publication yesterday of the latest public sector employment data for both Scotland and the UK offers some help in answering these questions.

The issue is complicated for Scotland by the inclusion of the Scottish employment in HBOS and RBS in the public jobs data from the fourth quarter 2008, after the UK government took a majority stake in each. For ease of analysis I have put this employment back into the private sector. That done we get the following chart:

Public sector jobs (not FTEs but the head count) peaked in Scotland and Wales in 2008q4, in Northern Ireland in 2009q1 and in England in 2009q4. So, it is interesting that in Scotland, Wales and Northern Ireland, at least, public sector jobs were contracting even as the UK government was introducing a temporary fiscal stimulus. But when that stimulus turned to fiscal consolidation and austerity public sector job losses continued apace.

The chart suggests that Scottish government (and the reserved public sector in Scotland) was both quicker out of the blocks in introducing cuts and in the scale of the job losses. The reserved public sector - ex banks - contracted in Scotland at -10.7% from the peak at a faster rate than devolved public sector jobs. But the loss of Scottish government jobs was still large at -7.2% from the peak, compared to Northern Ireland and Wales.

So, what were the implications of all this for total employment and private sector employment in Scotland. The chart below offers some insights

Because the data are not seasonally adjusted I have smoothed the series using a four-quarter moving average. Public sector jobs in Scotland were falling through the recession and the decline accelerated as the recovery in the economy began. By 2001q4, the smoothed public sector series was -5.7% below its peak. But employment overall was -2.8% below peak. Clearly, it appears that there was no burst of private sector job creation as public sector jobs fell. This would appear to provide strong evidence against those who argued that cutting back the public sector would 'crowd-in' private sector employment. Conversely, at first sight it does not appear that the loss of public sector jobs would have made much difference to the path of the recession and recovery. The purple line is a hypothetical jobs figure with public sector jobs held at their peak throughout the subsequent period. On that basis, the recession would have been little different while the recovery would have been somewhat stronger. Total jobs in 2001q4 would have been -1.6% below the pre-recession peak compared to the actual -2.8%.

But wait! The latter calculation ignores any demand or multiplier effects on private sector employment of the reduced incomes and spending from the lower level of public jobs. If we use a public sector multiplier drawn from the Scottish input-output tables (Technical: Type II employment multiplier of 1.66) total employment would have been 0.7% below the pre-recession peak rather than 2.8%. Once that is done, the effect of fiscal austerity on overall employment is seen not to be trivial. However, the exercise should be viewed as illustrative. It might overstate the austerity effect because any 'crowding in' effects from lower wage costs and improved competitiveness in the private sector due to job shedding in the public sector have been ignored.

Nevertheless, that caveat apart, on the unsmoothed series total jobs have fallen by -90,000 since the pre-recession peak, private sector jobs have fallen by -48,800 and public sector jobs by -44,200 from their peak (The numbers don't added up to 90k because the peaks are different). In the absence of fiscal austerity, on a best case scenario, we might have been looking at a much lower job loss of around -16,000 instead of -90,000. This is one price we in Scotland appear to have paid for the UK government's policy of appeasing the bond markets and encouraging the confidence fairy.